Amortisation of certain preliminary expenses
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 44(1) of Income Tax Act 2025
44(1) If an assessee, being an Indian company or a person (other than a company), who is resident in India, incurs any expenditure specified in sub-section (2)—
- (a) before the commencement of its business; or
- (b) after the commencement of its business, in connection with the extension of its undertaking or in connection with its setting up a new unit,
the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive tax years beginning with—
- (i) the tax year in which the business commences, for clause (a); or
- (ii) the tax year in which the extension of the undertaking is completed or the new unit commences production or operation, for clause (b).
Section 44(2) of Income Tax Act 2025
44(2) The expenditure referred to in sub-section (1) shall be—
- (a) the expenditure in connection with—
- (i) preparation of feasibility report;
- (ii) preparation of project report;
- (iii) conducting market survey or any other survey necessary for the business;
- (iv) engineering services relating to the business;
- (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business;
- (c) if the assessee is a company,—
- (i) legal charges for drafting and printing of the Memorandum and Articles of Association of the company;
- (ii) fees for registering the company under the provisions of the Companies Act, 2013;
- (iii) expenditure in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; and
- (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act), as prescribed.
Section 44(3) of Income Tax Act 2025
44(3) In relation to expenditure specified in sub-section (2)(a), the assessee shall furnish a statement containing the particulars of the expenditure in such form and manner, as prescribed.
Section 44(4) of Income Tax Act 2025
(4) The total expenditure referred to in sub-section (2) shall be restricted to 5%—
- (a) of the cost of the project; or
- (b) of the capital employed in the business of the company, where the assessee is an Indian company, at its option.
Section 44(5) of Income Tax Act 2025
44(5) In this section,—
- (a) “cost of the project” means the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings) and—
- (i) for cases under sub-section (1)(a), the cost is calculated as of the last day of the tax year when the business commences;
- (ii) for cases under sub-section (1)(b), the cost is calculated as of the last day of the tax year when either the extension of the undertaking is completed, or the new unit commences production or operations,
- which only includes fixed assets acquired or developed in connection with the extension of the undertaking or setting up of new unit;
- (b) “capital employed in the business of the company” means—
- (i) in cases under sub-section (1)(a), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the tax year in which the business of the company commences;
- (ii) in a case under sub-section (1)(b), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the tax year in which the extension of the undertaking is completed or,
- as the case may be, the new unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company;
- (c) “long-term borrowings” means—
- (i) any moneys borrowed by the company from Government or IFCI Ltd., or ICICI Ltd., or any other financial institution which is eligible for deduction under section 32(e) or any banking institution (not being a financial institution referred to above); or
- (ii) any loan or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the tenure of loan or debt is not less than seven years.
Section 44(6) of Income Tax Act 2025
44(6) If the assessee is a person, other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless,—
- (a) the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant before the specified date referred to in section 63; and
- (b) the assessee furnishes for the first year in which the deduction under this section is claimed, the report of such audit by such date in such form duly signed and verified by such accountant and setting forth such particulars, as prescribed.
Section 44(7) of Income Tax Act 2025
44(7) If an undertaking of Indian company entitled for deduction under sub-section (1) is transferred before expiry of five years specified in the said sub-section, in a scheme of amalgamation, to another Indian company, then—
- (a) no deduction under sub-section (1) shall be allowed to the amalgamating company for the tax year in which amalgamation takes place; and
- (b) all provisions of this section shall continue to apply to the amalgamated company as they would have applied to the amalgamating company, as if the amalgamation has not taken place.
Section 44(8) of Income Tax Act 2025
44(8) If an undertaking of Indian company entitled for deduction under sub-section (1) is transferred before five years specified in the said sub-section, in a scheme of demerger to another company, then—
- (a) no deduction under sub-section (1) shall be allowed to the demerged company for the tax year in which demerger takes place; and
- (b) all provisions of this section shall continue to apply to the resulting company as they would have applied to the demerged company, as if the demerger has not taken place.
Section 44(9) of Income Tax Act 2025
44(9) If a deduction under this section is claimed and allowed for any tax year in respect of any expenditure referred to in sub-section (2), deduction shall not be allowed for such expenditure under any other provision of this Act for the same or any other tax year.
FAQs on Section 44 of Income Tax Act 2025
1. What is Section 44 of the Income Tax Act, 2025 about?
Section 44 allows amortisation (spread of deduction) of certain preliminary expenses incurred before commencement or in connection with expansion of a business, over a period of five tax years.
2. Who is eligible to claim deduction under Section 44?
- Indian companies
- Resident individuals and other non-company residents
3. What types of projects does Section 44 apply to?
- New business setups
- Extensions of existing undertakings
- Setting up of new units
4. From which year is the deduction available?
- For new business: from the year of commencement
- For expansion/new unit: from the year in which production/operation starts
5. What types of expenses qualify under Section 44(2)?
- Feasibility report preparation
- Project report preparation
- Market or business surveys
- Engineering services
- Legal drafting for agreements
- Company-related preliminary costs (like MoA, AoA, registration, public issue expenses)
6. Are there any expenses which are excluded?
Yes. Any expense already allowable as a deduction under another provision of the Act is excluded.
7. Is there a ceiling on the total expenditure eligible for amortisation?
Yes. The eligible expenditure is capped at 5% of:
- Cost of the project, or
- Capital employed (only for Indian companies)
at the taxpayer’s option.
8. What is “cost of the project” under Section 44?
The actual cost of fixed assets like land, building, machinery, furniture, etc., as of:
- Last day of the year of business commencement (new business)
- Last day of the year when extension/new unit begins operations (existing business)
9. How is “capital employed” calculated?
For companies, it includes share capital, debentures, and long-term borrowings related to the business or its expansion.
10. What qualifies as “long-term borrowings”?
Loans from government, ICICI, IFCI, financial/banking institutions, or 7+ year foreign loans for capital machinery purchase.
11. Over how many years is the deduction allowed?
Deduction is allowed in 5 equal instalments starting from the relevant tax year.
12. What documentation is required for claiming the deduction?
- Statement of expenditure for items under Section 44(2)(a), in prescribed format.
- For non-company assessees: audited accounts and audit report in prescribed form.
13. Can a company claim this deduction if it is also claiming deduction under another section for the same expense?
No. A deduction once claimed under Section 44 cannot be claimed again under any other provision.
14. What happens if a business claiming Section 44 deduction is amalgamated?
- The amalgamating company cannot claim deduction for the year of amalgamation.
- The amalgamated company continues to claim the remaining deductions as if amalgamation hadn’t occurred.
15. What is the treatment in case of a demerger?
- The demerged company loses the deduction in the year of demerger.
- The resulting company takes over and continues the deduction.
16. Is audit mandatory to claim the deduction?
Yes, for non-company assessees, audit of accounts is mandatory and the audit report must be filed in the first year of deduction.
17. Is any form or manner prescribed for submitting expenditure details?
Yes. The statement for Section 44(2)(a) expenses must be furnished in the form and manner as prescribed (to be notified by rules).
18. Can the option between “cost of project” and “capital employed” be changed later?
No. Once the option is exercised by a company, it is binding.
19. Are there any specific exclusions in the computation of fixed assets for “cost of project”?
Yes. Only fixed assets connected to the business/expansion or new unit are considered.
20. Is land development included in the project cost?
Yes. Expenditure on land and building development is included in the cost of the project.
Section 44 of the Income Tax Act, 2025 offers a structured benefit to Indian companies and resident assessees by allowing them to amortise specified preliminary expenses over five tax years. This provision ensures that genuine setup and expansion-related costs are recognized and deductible in a phased manner, easing the financial burden during the initial years of business or project expansion.
However, the benefits under this section are subject to strict conditions regarding the nature of expenses, timing of incurrence, documentation requirements, and limits on quantum (5%) based on project cost or capital employed. Compliance with audit and reporting obligations, especially for non-company assessees, is critical.
Ultimately, Section 44 incentivises informed business planning, encourages proper documentation and ensures fairness by disallowing double deductions under other provisions.
